Chances of March rate cut sink

Business Reporter

A better-than-expected forecast of business investment for the next financial year and a lift in new home sales have eased pressure on the Reserve Bank to cut the cash rate at its board meeting next week.

Private new capital expenditure fell 1.2 per cent in seasonally adjusted terms for the December quarter, but the first estimates for 2013-14 were more positive, coming in at $152.2 billion - at the top end of economists’ expectations.

Analysts said while there was a high level of uncertainty in first estimates, the 2013-14 figures were encouraging and meant the Reserve Bank was likely to keep interest rates at 3 per cent for the rest of the first quarter.

“Overall, this report is not a trigger for a March rate cut,” TD Securities strategist Alvin Pontoh said in a research note.

Advertisement

Financial markets trimmed back their expectations of a March interest rate cut by more than 10 percentage points, to 18 per cent, following the data release by the Bureau of Statistics today.

Commonwealth Bank senior economist Michael Workman said while the figures for the fourth quarter were soft, the 2013-14 expectations meant mining investment was still expected to peak later this year - and that a March rate cut was unlikely.

"If anything, [the Reserve Bank's board members] were preparing people for some weakening based on their own survey techniques," Mr Workman said.

"This was probably in line with those factors that they were considering when they were cutting rates last year, so it makes a move in March still as unlikely as yesterday.

"Now we just move on to the next set of employment figures as a possible break for the market in pricing away the chance of a [interest rate] move in the short term."

The dollar initially slipped below $US1.02 on the headline fourth-quarter number, but quickly regained ground and was recently trading nearly 1 per cent higher for the day at $US1.0275.

Meanwhile, new home sales rose for the fourth consecutive month, with a 4.2 per cent increase in January, a Housing Industry Association survey of Australia’s largest volume builders.

At the same time, private sector credit growth rose by 0.2 per cent in January, following a 0.4 per cent lift in December, reflecting continued consumer cautiousness.

UBS interest rate strategist Matthew Johnson said while the capital expenditure data showed mining investment had peaked, “what it tells you is that it's not a drop, it's more like a droop”.

“The manufacturing sector still appears to be weak in terms of capex intentions, but the non-mining, non-manufacturing sector seems to be getting some traction,” Mr Johnson said.

“The lower capex and lower construction numbers introduce a little bit of downside risk but we still think [gross domestic product] of around 0.75 per cent for the quarter.”

National Australia Bank’s senior economist David de Garis said there was still a “high degree of uncertainty” about whether non-mining investment would be able fill the void left by the expected peak in mining investment by the second-half of 2013.

“There’s still no clear growth joy for the RBA in these figures and room for them to ease further,” Mr de Garis said, adding that NAB still expected the cash rate to fall by 75 basis points this year, with the first RBA rate forecast to fall in May.